Israel says it will build almost 700 new homes in parts of Jerusalem that lie beyond the 1967 borders in a move that has angered Palestinians and is likely to lead to American condemnation.

JERUSALEM–Israel says it will build almost 700 new homes in parts of Jerusalem that lie beyond the 1967 borders in a move that has angered Palestinians and is likely to lead to American condemnation.

Monday's announcement, which Israeli Housing Minister Ariel Atias said was meant to help alleviate a housing shortage in Jerusalem, came despite an Israeli declaration that it would freeze settlement expansion in the West Bank to help restart Israeli-Palestinian peace talks.

Palestinians consider East Jerusalem, which Israel occupied in 1967 and unilaterally annexed, to be the future capital of a Palestinian state. Israel maintains that East Jerusalem will remain part of Israel's capital.

"The Israeli government has been willing to demonstrate great flexibility when it comes to construction in the West Bank but we've made a clear distinction between the West Bank and Jerusalem," government spokesman Mark Regev said in an interview. "Jerusalem is our capital and will stay as such."

Regev said that Israel last week authorized the building of 500 new homes in Silwan, one of Jerusalem's Arab neighbourhoods, and this week Israel announced building in the Jewish neighbourhoods of Pisgat Ze'ev, Neve Ya'akov and Har Homa to alleviate housing shortages for Jerusalem residents.

"The Israeli government proves every day that it is not ready for peace," he told the Reuters news agency.

Last month, Israel announced it would build 900 homes in Gilo, south Jerusalem, sparking tensions with U.S. President Barack Obama's administration. Two of the neighbourhoods are near the West Bank town of Ramallah, while Har Homa abuts Bethlehem. Some 250,000 Israelis already live in East Jerusalem, along with 300,000 Jewish settlers in the West Bank.

Some Israeli analysts said the announcement of new construction is meant to torpedo any resumption of Israeli-Palestinian peace talks.

"This is a clear indication of (Prime Minister Benjamin) Netanyahu's picking a fight with the Obama administration," said Dani Seidemann, a dovish lawyer who specializes in land use in Jerusalem.

"It makes it very difficult for Palestinians or anyone in the Arab world to resume negotiations with Israel without looking complicit in giving away East Jerusalem."

Israeli official Regev denied the announcement of the new homes would cause tensions with the Obama administration.

"We've got open channels with the Obama administration with total transparency," he said. "There are no surprises."

White House press secretary Robert Gibbs said Washington "opposes new Israeli construction in East Jerusalem" and that neither side should take steps that pre-empt the outcome of talks. He urged both sides to restart negotiations without preconditions.

Obama's Mideast envoy, George Mitchell, who is trying to find a formula for reviving negotiations, is due in Israel and the West Bank in the second week of January.